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The following article was published in our article directory on September 10, 2010.
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Global Imbalances are Structural Issues Rather Than Policy Issues

Article Category: World Affairs

Author Name: xia zihui

Global imbalances is the continued accumulation of U.S. current account deficit and debt, while the exporting countries such as China's trade surplus and foreign exchange reserves continued to accumulate. Global imbalances, indeed, become an obstacle to economic development and the risks of financial crisis. However, it is not originated in the monetary or fiscal policy errors. Global imbalances is the current international monetary system to the world economy's structural deficiencies. As Apple always sell floor like, as long as the existing structure of the international monetary system remains unchanged, no matter what kind of monetary and fiscal policies can not prevent the recurrence of the imbalance.

Money has three functions: medium of exchange, denominated in units and store of wealth. The current international monetary system in fact the U.S. dollar standard system. World trade, commodity price and foreign exchange reserves with the most dollars. Neither the U.S. dollar standard system is based on the needs of the world economy created in consultation, and no corresponding rules, mechanisms and institutions to maintain the value of the dollar as world currency and function. It is the collapse of the Bretton Woods system, by historical inertia exists. If you must use a country's currency as a world currency, then the dollar is indeed the most qualified. Size of the U.S. economy, the bond market, property rights protection system, financial institutions and political stability, the history and current status of the U.S. dollar, the dollar's international status are the foundation. However, as the collapse of the Bretton Woods system 40 years ago proved that with the expansion of the scale of the world economy, even if the dollar can not alone bear the responsibility of world currency.

Dollar Standard system is a continuation of the Bretton Woods system. The Bretton Woods system, the dollar value of gold is guaranteed, the dollar standard system, people in the idea of using credit instead of the U.S. government gold; the Bretton Woods system, the gold is the nature of savings instruments, the Treaty consider only the trade balance and stability of the currency. Dollar's role is as a means of payment. This system does not take into account the accumulation of wealth, savings in the international transfer and foreign exchange reserves and so on. The dollar standard system, the dollar is one more to replace the gold as an international store of wealth function.

Fundamentally, the U.S. deficit and the debt did not originate in the uncontrolled consumption, but rather originated in the world to provide liquidity needs. The initial borrowing money to India. Development of world economy requires international currency. The dollar standard system, the issue of currency is the U.S. government credit guarantees, rather than gold. Since the 70s of last century, because there is not enough and the export of capital goods offset the hedge, the U.S. government must borrow money to ensure the U.S. dollar to foreign credit. U.S. dollar through trade by foreign enterprises in the country can not spend, then re-lent by the central bank the United States. The U.S. dollars the U.S. government will in turn be used internally. Thus, the United States issued one U.S. dollar each, in fact in the world to create two U.S. dollars of credit. 1 dollar into a foreign government-held debt, a dollar returned to the U.S. consumer. In this loop, not the consumer led to the debt, but debt for consumption. Banking intermediary business to take more, that is, loans to generate savings rather than savings generated loans. Internationally the dollar needs, the U.S. government have to print money, the printing of money to borrow. In theory, if this continued accumulation of debt, one day all of the assets of the United States will fall into foreign hands.

U.S. GDP less than 14.5 trillion U.S. dollars last year, the U.S. dollar supply (M2) in July of this year is 8.6 trillion U.S. dollars. Global foreign exchange reserves in 2009 is 13% of global GDP, of which more than 60% in U.S. dollar assets, that is, more than 50,000 billion dollars. According to IMF estimates, at current growth rates, global foreign exchange reserves will reach U.S. 2035 GDP of 690 percent. At the same time, the world also face the problem of oil dollars. Need the support of a large number of dollars of oil to enter the market. If the oil price per barrel of 70 dollars, now the world's known oil reserves of 85 trillion U.S. dollars, oil exporting countries 1.5 trillion per year income. To meet these needs, you need to release a lot of dollars. The dollar does not reflect the economic strength of the United States. However, they represent a commitment by the United States credit.

If released in the U.S. dollar as the world trade deal means necessary, then, the Chinese hold large dollar is because there is no other effective means of wealth storage. China's exports of goods includes the value added created by workers, these values need to return to the country from abroad. Back due to lack of other sources of wealth, they accumulated in the form of trade surplus. Emerging national social welfare system and the financial system must keep up with productivity growth rate the pace of development. Therefore, this part of the wealth of society need to temporarily store and gradually digested. The so-called wealth, referring to some in the future also has the same purchasing power today, things. As the RMB is not an international currency in the international arena does not have this capability, the dollar became the preferred means of reserves.

Western economists say that the Chinese save a lot of foreign exchange is to prevent the recurrence of the Asian financial crisis and intervene in the currency market, this is textbook-style reasoning. In accordance with the international conservative estimate, for China, as long as 6 months of imports hold a considerable amount of foreign exchange, is sufficient to meet the urgent need for trade and to withstand the impact of hot money. This is about one trillion U.S. dollars. On the one hand, Japan's experience shows that the accumulation of foreign exchange with the level of the exchange rate does not necessarily linked. On the other hand, even if China becomes net importer of tomorrow, because the renminbi freely convertible in the international arena, in order to ensure the wealth of international liquidity, the government, enterprises and individuals through various channels, or will the yuan into U.S. dollars will be stored.

A country with a population of 1.3 billion, the 2.45 trillion U.S. dollars is not a very high figure. By the end of 2009, the United States alone, private sector and individuals overseas to 18.4 trillion in assets, the U.S. Federal Reserve agents other central banks have managed the assets of 2.4 trillion. Americans hold dollar assets, no problem, because the dollar is the international currency is the currency; Chinese are holding U.S. dollar assets has become unbalanced. Because the dollar is the currency of different international currencies.

This duality of dollars caused by the so-called "Triffin problem": to provide the world with U.S. dollars, the United States to liability; the United States debt, people will lose confidence in the dollar. International Monetary privileges from its mobility, but also from its value stable. Dollars behind the "gold" is the Fed's monetary policy, Federal Reserve monetary policy is to maintain stability of 3% inflation rate target. In other words, the dollar reserves of marked price depreciation of 3% annually. This same central banks use the dollar as a store of wealth, the purpose of conflict.

U.S. dollar as a world currency, one of the premises is the U.S. government can not directly intervene in the currency market. Currency exchange rate is expressed in other countries, local currency prices. Because the U.S. dollar can not directly manipulate the price, therefore, whether other currencies the dollar should depreciate or appreciate Dollar Standard system has become a constant problem. In 2002, Japan to support the dollar, the currency market to inject 320 billion U.S. dollars, equivalent to one per cent of global GDP. Today, only driven by Asia, will it be possible to adjust the dollar significantly. Therefore, the voice behind the yuan appreciation, real depreciation of the dollar is so wishes.

Whether the growing U.S. debt is growing, China's foreign exchange reserves, are the current international monetary system brought about the inevitable consequences of structural defects. Solution to the problem of not adjusting the exchange rate, but the reform of the current international monetary system.

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